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The number one story today is around the economy and the fact that that it’s really slowing. It’s quite troubling at various spots around the world. We see problems in the United States, we see huge problems in Europe, we see slowing growth in China, we see slowing growth in India and Brazil. So it is quite unsettling. And the impact that has on governments, and especially the tax authorities, is something that we are all having to deal with.
Huge changes from a tax perspective. There are changes in tax legislation and tax law. Governments are struggling with trying to make sure that they maintain the revenue sources that they can, because the spending side is extreme, the deficits are extreme, so we are seeing all kinds of new taxes being introduced, especially on the personal income tax side, and on the indirect tax side. We are seeing rates increase, especially in places like Europe. Seventy-five percent marginal tax rate in France, 68 percent marginal tax rate on the personal side in places like the Netherlands. And so that has a huge impact.
So far there hasn’t been much impact on corporate tax rates, but just wait. That’s gonna have to change, because, you know, governments are elected by people, the people when they look at the policies being undertaken by the government, if they see individual tax rates go up quite dramatically, if they see VAT or indirect taxes go up quite dramatically, those are taxes that corporations don’t pay. When is it time for the corporations to start to pay up? So we are starting to see more and more pressure on corporate income tax rates. After what was perhaps a decade of declining rates globally.
This is where governments are gonna really have to struggle from a policy perspective. Because if you want to be competitive in the global economy, you have to make sure that you’ve got the right environment to attract new investment and new business. One of the key factors is the corporate income tax rate. And if you start playing with that too dramatically, getting it away from kind of the global best standard of around 25 percent - 20 to 25 percent is kind of what multinationals would expect to have to pay when they go into a jurisdiction – you start messing with that and all of a sudden your country starts becoming less and less competitive. From a medium and long term perspective that’s exactly where governments do not want to place their economy. They want to make sure they are as competitive as they can be, because one of the three ways to get out of a deficit situation is:increase taxes, reduce spending, but the best way is to grow. And for growth you need private company investment, and you need that kind of activity to create jobs.
There is a couple of areas where Chief Tax Officers or tax directors really have to think about things. The first thing is there are changing rules and regulations. And frankly, we are pretty good at that. We get into the business of tax because of the fact that we like to deal with changes and regulation and rules etc, and as long as we are on top of that we do okay.
One of the biggest areas where there are a lot of changes, just how aggressive the tax authorities are becoming, because they have to maintain the revenue source for their country. And so we’re seeing a lot more activity in audits, in challenges, in disputes, and frankly that’s a big part of our business, a growing part of our business unfortunately, just helping clients deal with the situation where they run into trouble with tax authorities and have to manage their way out of that particular situation.
So the biggest area we see in disputes and controversy around the world is around transfer pricing, where governments want to make sure that every dollar of the value chain that is earned in their country is taxed in their country. And so that’s an area of particular concern. It’s really important for tax directors to make sure they’re managing the relationship that they have with the tax authorities. Everywhere around the world that’s something we didn’t have to worry about so much anymore, but as tax authorities get more aggressive in their behavior, it’s important that we’ve got an open, respectful relationship with tax authorities around the world – something that needs to be monitored frankly by the Chief Tax Officer at Head Office.
Well, it’s interesting the way governments are trying to deal with the changing tax environments. Some of the tax authorities are actually going out of their way to be business friendly. Having an open, honest, transparent relationship; wanting to talk about the issues that arise; and work together with companies to resolve their issues in real time basis. If you can live in that kind of situation it’s fantastic, as far as being a tax director goes, because you get certainty around your tax filings, in a fairly quick manner, and that’s fantastic.
What we also see though in other situations is where the tax authorities are getting much more aggressive, less trusting than they were before and especially in those countries which don’t have a good track record of compliance around taxation, if you get really aggressive with those that are in the system instead of those that aren’t in the system and make their life miserable, you tend to just want to create more of an appetite for them to leave the taxation system which of course has a tremendous drain on revenues and is not helpful to the societal fabric within a country. So I worry about some of these trends that are happening.
We’re gonna see a lot of the trends that we have seen before. We’re gonna see full transparency be expected by the tax authorities. We are going to see more disclosure expected by lots of different entities. You are going to see reporting on how much taxes corporations pay, especially in the extraction businesses per country. You are going to see a lot more disclosure around uncertain tax positions. We are going to continue to see and be stressed open relationship with tax authorities where in fact multinationals sort of open up their entire storybook as it relates to taxation, and have to share that with tax authorities.
What I am unsure of is just how long the global economy is going to affect the behavior of tax authorities, and tax payers and governments. If we continue to see a cycle, which is extended, where we’ve got huge pressure on government revenues, large deficits, we’re going to continue to see pressure within the system, a breakdown in the relationship between tax authorities and tax payers that will extend to corporations as well. And then I’m not exactly sure where that’s gonna go. It’s just not a very healthy situation right now. And I do have concerns with what we see in areas like India, like Europe, etc., it is quite troubling.
One, I think, it’s important for them to be very connected in with the whole strategic element of the corporation with which they belong. Now is the time for tax to be more connected into other elements of the business than they ever have before – whether that’s mergers and acquisitions, whether that’s risk, whether that’s other parts of the strategy. You need to have a code of conduct. You need to understand what you gonna do from a tax perspective, and that has to be signed by the CFO and ultimately I believe the Board. You need to have a good understanding as to what you’re doing around internal controls around taxation. You can’t have a situation where you’ve got any surprises coming out of the tax function within a corporation. Because in today’s environment, it doesn’t take very long for you to be criticized from a tax perspective and that criticism all of a sudden end up on the front page of the Financial Times or other newspapers. But more importantly with social media, it can be like a wild fire, catch, and away it goes and the whole enterprise’s reputation is at risk. I think that that scenario is something that tax directors have to be concerned about. The relationship with tax authorities, making sure that you’ve got that proper relationship so things don’t get out of hand. The last thing you want is a subsidiary to have a poor relationship with the tax authority in some place far removed around the world and all of a sudden that becomes a major, major issue not only within your department, but within your corporation overall.
Well, I think it’s an opportunity for tax directors to get much better connected into other parts of the corporation and other elements of the strategy, and frankly that’s a lot of fun. I think that tax directors have had to deal with changes in rules and regulations, dealing with tax authorities, etc. If they can be more of a strategic fabric of a corporation that really enhances, frankly, their job, but also adds additional value to the corporation that, you know, sometimes that corporations don’t see the value that the tax function does bring.
I think there is also an element in today’s environment to celebrate some of the good work that’s being done by corporations in collecting and remitting huge amount of tax. So if you think about indirect taxes they are all collected by corporations. If you think about all the corporate taxes that are paid, all the mining taxes that are paid, etc., etc., etc. The amount of revenue that’s either collected by or paid by multinationals to the global economy, to the revenue stream within governments, is huge.
You’re starting to see some corporations now get upfront, consider it a corporate social responsibility issue, actually publish figures as to the amount of taxes that they’re collecting and remitting to the government. And I think that that is critical because that part of the story isn’t always told. Governments don’t tell it, typically, individuals do not understand it, it’s not something that hits the press and I think that we’ve got to get more bold in coming forth as tax payers, corporate tax payers, and telling our side of the story as well.
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